ALL social welfare payments including child benefit should be subject to taxation as a general rule, the Commission on Taxation has recommended.
It also proposes that people earning the minimum wage of €8.65 per hour should continue to be exempt from paying tax.
The commission recommends the introduction of a single system of collecting income tax rather that the present four-strand system which incorporates income tax, PRSI contributions as well as health and income levies.
However, it admits that any move towards a single system could result in more low-income earners coming into the tax net, while significantly increasing the tax liability of high earners.
The commission argues the principle of taxing all social welfare payments should be adopted on the basis that all income should be taxed regardless of its source as well as ensuring they do not act as a disincentive to work.
However, it also proposes that there should be no changes to the existing tax status of maternity, adoptive and health and safety benefits, while specific exemptions from income tax should also be introduced for family income supplement, the domiciliary care allowance and the respite grant.
It recommends that the Department of Social and Family Affairs should collect tax due on social welfare payments as it would allow recipients to know how much money they have available to them rather than face an unquantified tax liability at some future point.
It calls for a separate review of the PRSI system to broaden and rationalise its base including the extension of PRSI to investment and rental income of employees.
Trading losses for self-employed people should also be deductible for PRSI purposes subject to a payment of a minimum annual contribution, while the employee’s PRSI ceiling of €75,036 should be abolished on a phased basis.
The commission also recommends the introduction of a third rate of income tax in addition to the current rates of 20% and 41%. However, the Commission chairman, Frank Daly, said it did not specify whether a new rate should be above, below or between the existing rates.
The commission believes a third rate of income tax would allow for greater equity, progressivity and flexibility. However, it should only be introduced in the context of keeping tax on labour low and marginal rates competitive.
It also proposes retaining the measure introduced in 2007 to impose limits on the use of tax reliefs and exemptions by high earners. The commission recommends that such limits should be periodically reviewed and that the current limit which apply to individuals earning more than €500,000 per annum should be reduced to people earning €250,000 per annum.
The commission recommends that the 183-day test for determining resident status should be supplemented by additional criteria including the location of a person’s permanent home and their “centre of vital interests”.
In general, the commission supports the general continuation of the family being the unit of taxation for all direct taxes. However, it also said the hybrid system introduced in 2000 which allows for the individualisation of standard rate bands and tax credits should be retained.
The commission believes any capital gains that arise from inflation should not be taxed. However, it proposes limiting the reliefs available for the transfer of business and farm assets between family members and the re-introduction of rollover relief in the case of farmland disposed of under a compulsory purchase order.
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